Insights from BCC Research

Samsung Electronics to Make Qualcomm's Snapdragon 820 Chips

Last month Qualcomm announced that Samsung Electronics Co. Ltd will become the sole manufacturer of its new flagship mobile chip, the Snapdragon 820. The development signals the semiconductor giant’s first order with a foundry other than Taiwan Semiconductor Manufacturing Co Ltd (TSMC) to make high-end chipsets. Taiwan-based TSMC, the world’s largest dedicated independent semiconductor foundry, counts Qualcomm, along with NVIDIA and Advanced Micro Devices, among its top customers.

According to Se Young Lee, Qualcomm’s Snapdragon 820 orders could earn Samsung more than “$1 billion in revenue at its Taiwanese rival’s expense.” The deal is a major boost for the South Korean tech giant’s electronic contract manufacturing business.

WHAT ARE ELECTRONIC CONTRACT MANUFACTURING SERVICES?

Electronics contract manufacturing (ECM) services include operations such as designing, manufacturing, testing, distributing and providing repair services for electronic assemblies required by original equipment manufacturers (OEMs). These services are also referred to as electronics manufacturing services.

“Electronics contract manufacturers serve a growing range of the electronic products market, which includes personal computers and servers, Internet routers and switching gear, communications equipment (including mobile phones), consumer products such as computer games and televisions, industrial and automotive electronics, as well as space and aircraft electronics,” explains BCC Research analyst Srinivasa Rajaram.

ECM service providers like Samsung provide design and assembly of printed circuit boards (PCBs) and related components, final assembly of systems, and logistics- and inventory-related work, says Rajaram.

A BRIEF HISTORY

Rajaram says the tech industry was “originally dominated by large firms that produced most parts and components in their own factories or at different locations within their own country.” The arrival of the personal computer in the early 1980s, however, changed the industry, he says.

“The most prominent electronics companies no longer design, market and assemble final products themselves. Most of these companies are focusing on design and marketing, while outsourcing most of their component production and assembly to electronics contract manufacturing firms like Samsung and TSMC, which have become the principal companies in the manufacturing and assembly segment.”

KOREAN ECM SERVICES MARKET

The Korean government provided many benefits to help the growth of domestic manufacturers, and the Korean consumer electronics industry is now a significant leader in both technological development and market share, according to Rajaram.

“However, Korean manufacturers like Samsung have been facing competition from developing countries in Asia, especially China. Another issue is that Korean wages are higher compared to other Asian countries,” he explains. “Thus, the only option for Korea is to outsource production to lower labor cost markets such as China and Vietnam. To help in this process, many printed circuit board companies built manufacturing plants in the northern part of China. The ECM services market in South Korea has been facing major challenges and is trying to maintain growth.”

During the past few years, the Korean electronics industry has experienced an increase in orders from component suppliers and printed circuit board manufacturers due to the increase in demand within the overall electronics sector. However, major technology companies have started overseas procurement from Taiwanese manufacturers for some of their components and assembled products in an effort to reduce costs, Rajaram observes.

GLOBAL ECM MARKET OUTLOOK

Original equipment manufacturers (OEMs) initially used contract manufacturers to overcome component supply problems when faced with a sudden increase in demand, especially in the assembly of the printed circuit boards used in various electronic products. Contract manufacturers made only components or partial assemblies. But Rajaram says the cost advantages from contract manufacturing became apparent, and as pressures to reduce costs and speed up production intensified, more assembly processes were automated, and the capabilities of the contract manufacturer increased.

“OEMs are increasingly relying on contract manufacturers for more complex manufacturing services and also for prompt services,” the analyst notes. “All of the leading contract manufacturers have greatly expanded the range of services they offer, as well as their global presence, enabling them to have control over the inflow of purchased components, to optimize production between different factories and to balance inventories with demand. With the help of the top ECM service providers, OEMs can now launch a new product simultaneously in different parts of the world.”